Mortgages in Costa Rica

Mortgages are becoming more and more available in the local market for expats who want to borrow money to buy property.  There is a lot of money available for financing from local financial institutions.  Private parties also have money to lend, but usually the interest rates are higher.

What most foreigners do not know about borrowing money in Costa Rica is how the foreclosure process works if one should default on a loan.  Unscrupulous private lenders, attorneys and real estate people take advantage of the ignorance of homebuyers and, in some cases, use this knowledge to steal back properties they have sold.

On the other hand, deadbeat debtors can betray honest creditors with Costa Rican legal magic and procedural sleight-of-hand tricks.

In Costa Rica, a mortgage is a hipoteca.  In English, there is a similar word hypothecate. In Roman law it meant the most advanced form of a pledge. Today in civil law it means a lien or a mortgage.  A mortgage applies to real property whereas a lien applies to movable property or chattel.  In the foreclosure process, the procedures are very similar.  However, it is easier to hide chattel, and some debtors do so.

A mortgage in this country is a right granted over a piece of real estate to guarantee payment of an obligation.  Mortgages are most common in the purchase of property but can be a source for financial capital for other uses.  When the maker of a mortgage cannot pay, the creditor forecloses and goes to public auction, called a remate.

First mortgages are supreme. Any mortgage after the first are usually worthless here.  In the case of an auction based on the first mortgage, the judge will erase anything behind it when turning over the property to the winner of the auction.

This is what happens in a foreclosure:

A lawyer files a petition with the court attaching a national registry certification of the mortgage along with providing other requirements based on the country’s civil code.  If the court does its job correctly, it should set an auction date and request the lawyer in charge of the case to publish the designated date in the local judicial newspaper.

The court should send a notice to the national registry annotating the property about the foreclosure.  Smart lawyers request the court to prepare the documents for publication and the annotation for them to pick up, and they deliver them to their destinations. Otherwise the court will use its snail mail system.   In Costa Rica, these snails are slow.

When the auction date arrives, the creditor can suspend the act up to five minutes before the judge starts the auction process.  This usually happens when the parties reconcile or otherwise agree to an out-of-court settlement.

If only the creditor shows up, he or she can take
the property back in payment of the debt.  The creditor can attach other property of the debtor for interest, legal expenses and court costs.  If the creditor does not want the property, he or she can request the court to hold other auctions until there is a successful one.

The starting bid at an auction is the amount due.  Each subsequent auction reduces the opening bid amount by 25 percent until the starting bid is zero.

If bidders show up, they must deposit in cash or by certified check 30 percent of the auction base to bid.  Creditors cannot bid but can raise the base of the auction upwards to cover interest and costs.

The winner of the auction must pay the balance of a winning bid to the court in three business days after the auction.  Shill bidders sometimes show up at the auction, deposit the required 30 percent deposit and then never pay the balance to cause the judge to call a void auction.  Debtors can use this ploy as a delaying tactic so they can gain more time to look for funds to pay a creditor.

If everyone plays fair — it does happen on occasions — the highest bidder pays the court, the judge approves the event and prepares the court documents necessary to turn over the property to the new owner.  If there are any tenants living in or on the auctioned property, the judge also prepares the paperwork to evict them.

Many auctions happen in Costa Rica on business days.  Some of them are real bargains. Others turn into nightmares because there are hidden problems just waiting to show their ugly heads.

When a piece of property is going to foreclosure, it is common that the debtor’s attorney will start a litigious nightmare for the creditor.  The first thing a debtor’s attorney tries to do is to look for a trumped up way to file a criminal case against the creditor to suspend the auction.   This simple legal ploy can hold up a legitimate foreclosure for years.  In other cases, crooked notaries just cancel the mortgage with a bit of flashy paperwork.

There are other financial instruments to borrow against property like mortgage certificates and trusts. Financial institutions prefer a first-degree mortgage.  To borrow money, it is best to use a reputable bank. To lend money to others, it is better to use financial experts that know the ins and outs of the game.